How Murdoch reporters’ bribes to British cops violate U.S. law

Imagine you’re a Fleet Street reporter at a British tabloid with a pocketful of cash. You meet a trusted source at a pub, a police officer who tells you about the royal family’s confidential schedule in exchange for a small gratuity. You hand over a few quid and rush off with a photographer to stake out a health club where Camilla Parker-Bowles is toning her abs.

Guess what: If you work for Rupert Murdoch, you may have violated U.S. law. What the government nails you for could depend on how you and your bosses account for the sketchy deal with the cop.

If you’re entirely honest in the company’s internal books and enter the payment as a “bribe,” you’ve just created an irrefutable piece of evidence that can be used against you and your company in a prosecution by the Justice Department for violating U.S. statutes against overseas bribery. If, as is more likely, you file an expense account which refers to the cash payment as “taxis” or “office supplies,” you stand a chance of being pursued by the Securities and Exchange Commission for keeping fake records.

News of the World, Britain's largest-circulation newspaper, stopped publication Sunday after being busted for bribing police and hacking cellphones of crime victims.

News International Limited, the British arm of the Murdoch empire, is a subsidiary of News Corp., a publicly traded American company which also owns The Wall Street Journal and Fox News (not to mention the Sunday Times of London, The Times of London, and the British tabloid The Sun.) Because of this, experts say, News Corp. and all of its subsidiaries come under the Foreign Corrupt Practices Act, a Watergate-era law which makes it a crime for U.S. companies to participate in bribery abroad.

The scope and number of payments remains unclear. British press reports say more than $160,000 was paid by News of the World reporters to police officers. The issue came to light last week after News International turned over a trove of internal emails to authorities.

“A small number of officers may have taken illegal payments. That is fundamentally corrupt,” Met Commissioner Sir Paul Stephenson told the BBC. “If true, I will be determined to root them out, find them and put them in front of the criminal court.”

After years of relative quiet, the United States has substantially stepped up the resources to prosecute companies for violating the bribery law. There are 150 open investigations of American companies, according to the law firm Gibson Dunn & Crutcher. In 2005, the Securities and Exchange Commission and the Department of Justice combined for a total of just 12 FCPA enforcement actions. By 2010 that number had jumped to 54, the law firm reports. We’ve written previously on this subject when it involved payments by Albert Jack Stanley, a former executive at KBR.

Unless information emerges that News Corp. executives in the United States were aware and condoned illegal behavior, it is doubtful whether the company or individual executives would face criminal prosecution in the United States, several defense lawyers said.

A prominent academic, Michael Koehler, who tracks prosecutions on his blog the FCPA Professor, is not as sure the global news giant will escape criminal prosecution.

“Look at the 2011 enforcement actions on my blog,” he says. “None of these involved high level officers or board members.”

But lack of evidence of executive complicity in bribery doesn’t protect the parent company from civil actions. Where News Corp. may be most vulnerable is under the “Books and Records” and “Internal Controls” provisions of the FCPA, according to lawyers who practice in this field.

Even if News Corp. subsidiaries recorded the bribes accurately in their books, it could land the company in difficulty with the SEC. Since the bribery was permitted in the first place, the charges would also open up the company to questions about its internal controls.

Fines for these violations can be steep. In 2009 and 2010 combined the Justice Department charged over 50 individuals and collected nearly $2 billion in criminal fines, said Assistant Attorney General Lanny Breuer in a recent speech. In 2010, the SEC brought in almost $530 million in corporate FCPA settlements, according to Koehler’s blog. Part of what makes it so lucrative for the government is that the SEC often requires the companies “disgorge” the gains they made from illicit activities and pay interest on them.

How the SEC would calculate the value of a scoop or a racy headline that resulted from a police bribe is an open question. Does one include a bump in weekly circulation? The long-time loyalty of readers? Until it was abruptly closed last week, The News of the World, the Sunday paper most closely linked to phone hacking, had Britain’s largest daily circulation, with 2.7 million readers.

“What was the increased revenue because of this sensational headline is more art than science,” says Koehler. “You could come up with some ballpark number.”

Another cost to News Corp. would be the company-wide review the SEC or DOJ would likely demand. The company would have to satisfy the Feds that similar payments weren’t made to government officials in other countries. These company reviews are part of the reason why FCPA inquiries can last for years, according to Koehler.

The statute of limitations on civil FCPA charges is five years. Reports about the illegal bribes seem to date back to 2006 so regulators would likely be mindful of the calendar. Companies are often rewarded for cooperating with the inquiries. “Raising a statute of limitations defense is not exactly cooperation mode,” says Koehler.

News Corp also depends on the government for its broadcast licenses. Fox Television Stations Inc. has 269 active licenses with the Federal Communications Commission, according to the agency’s website. An agency spokesman would not comment on whether FCPA violations might put those licenses in jeopardy as well.